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Regulation: An update

Nick Moules

27th September 2013

On Tuesday 24 September, an event was held by the UK Crowdfunding Association, of which rebuildingsociety.com is a recent member, and the Financial Conduct Authority (FCA). The FCA is one part of the former FSA and is charged with regulating the peer-to-peer industry from April 2014.

The meeting was designed to give platforms an update on who needs to apply for authorisation and how to go about it. Donation-based and reward-based platforms will not require authorisation and for anyone interested in reading more on the Threshold Conditions for authorisation, you can read the FCA’s guidelines here

So although the meeting was not supposed to be about policy, inevitably the conversation moved that way.

What’s becoming clear is a split in how the FCA plans to address peer-to-peer lending (including peer-to-business lending) and crowdfunding, which reflects the gap in risk between the two.

A new regulated activity “operating an electronic platform in relation to lending” will encompass rebuildingsociety.com and our competitors. The regulatory approach to this is being consulted on later this year.

Crucially, there doesn’t appear to be any precedent for including a minimum or maximum amount any one individual can lend. The key to protection, as pointed out by another delegate, is diversification, so deciding on how to ensure diversification, particularly for a new platform, will be a crucial aspect of the consultation.

A capital adequacy requirement will be decided in the outcome of the consultation paper, which could include three months’ running costs as a contingency.

For our part, we’ve always supported calls for regulation. It is the only way to scale the market and open it up to people who are not, by traditional interpretations “sophisticated”, yet are capable of making informed decisions. Our research, carried out earlier this year indicated that as many as one in four would lend to businesses when it becomes regulated so it seems like an opportunity not to be missed.

Crowdfunding faces a tougher journey. Campaigners are determined to include ‘the crowd’ in the industry. It’s the most altruistic element of it, but as the platforms themselves admit, it is risky stuff. As those of us with financial services experience will know, the FCA places the customer at the heart of its regulation. Do warnings at every stage of the journey go far enough to protect vulnerable consumers or is it easier to stop them participating in the first place? That’s the decision the FCA will have to make.

Peer-to-peer and crowdfunding share many similarities, but there could be an ever-increasing divide between the two fledgling industries. There are those who say regulation has come too soon for crowdfunding, as even the leading players don’t have sufficient data to talk about success rates. You could argue regulation needs to be passed now to stop the risk, but it’s possible that the transformational potential of the market is killed before it has been realised.

Crowdfunding has political support, so there is likely to be a long lobbying campaign to press this argument to the regulator.